Interactive Investor

US stock market outlook 2022: more record highs for Wall Street?

29th December 2021 09:43

Rodney Hobson from interactive investor

There has been no shortage of excitement in 2021, and financial markets have lapped it up. Our overseas investing expert scans the landscape for signs that 2022 will be another winner for investors.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

In the first year of his presidency, “sleepy” Joe Biden has done nothing in particular, but at least he has done it very well as far as investors are concerned.

The United States entered 2021 more divided than ever, with outgoing President Donald Trump still disputing that he had lost and provoking fears that Biden would be prevented from taking office. Despite all the problems now bestriding the globe, the outlook for America looks as settled as investors could have hoped just 12 months ago.

Biden has had the advantage of seeing his Democrat party control both houses of Congress but that has not proved to be an opportunity to push through a radical programme. Fortunately, despite the large number of Covid-related deaths in the country, the American economy is proving much more robust than was the case in 2009, the last time a Democrat president took over the reins in a crisis.

The economy is booming, thanks in no small part to Trump’s preference for underplaying the extent of the pandemic and choosing to risk a high death toll rather than enforce shutdowns, a policy that has largely continued under Biden.

As the year ends, unemployment is low and falling, while 10 million job vacancies are pushing up wages, and consumers are willing to spend and travel in defiance of the Omicron wave of Covid-19.

The new year should see the start of some real action that will impact on investors. The Federal Reserve Bank is already accelerating its “tapering” of support for the US economy, which has involved buying up assets such as Government debt.

The winding down of this programme will be complete by the end of March, three months sooner than had been envisaged as recently as this autumn, which is a welcome signal that the central bank feels the economy can stand on its own without this stimulus. Investors will be less keen on what follows: a rise in interest rates, probably starting in April, with perhaps two more increases to come before 2022 is out.

With consumer inflation hitting 6.8% in November and expected to remain close to 5% during next year, an increase in interest rates to keep a lid on price rises looks if anything overdue, even though it threatens to hit consumer confidence and cause a downward spiral.

Prices have risen at an annual rate of more than 5% for the past six months, and the December figure will be no better given the propensity of many Americans to splash out on Christmas. Since wholesale inflation reached a record 9.6% in November, there are still a lot of price rises working through the system. The target that the Fed is supposed to maintain is 2%, a figure we shall not see in 2022.

Yet the Fed’s more hawkish stance has been greeted with relief, almost enthusiasm, as a sign that life in the US is returning to normal and the economy can stand the news. The fear of inflation running out of control is greater than worries over what is still likely to be a modest monetary tightening. This is in sharp contrast with the last time that the Fed raised interest rates and the then President Donald Trump led a chorus of disapproval.

In any case, three interest rate rises will still probably take the benchmarket rate to only 0.9%, still remarkably low by historic standards and way below what would be necessary to provide a real return on savings.

Biden’s political troubles at home, restricting his ability to act decisively, are likely to continue throughout next year as the Democrats become increasingly nervous of losing control of both houses of Congress in the November mid-term elections and the Republicans become increasingly obstructive. There will be no scope for massive giveaways that will inflict further damage to federal government coffers.

As 2021 drew to a close, the president’s $1.75 trillion bill to bolster social care and fight climate change was pushed into 2022 as a Democrat senator continued to refuse support unless the cost and scope of the legislation is reduced. With exactly half the Senate seats, the Democrat block needs to vote together to pass any legislation, and even then it relies on the casting vote of the vice-president, who acts as its speaker. With even one Democrat senator having cold feet, the original $3 trillion proposal has been slashed and then delayed for months.

Also under threat are tax credits for green energy that are strongly opposed by the coal lobby.

Biden had hoped that a bipartisan agreement to spend $1 trillion on infrastructure that did pass into law would be just a start on a much wider spending spree incorporating child tax credits and paid family leave. The boosts to the economy have got through; the boosts to the income of the poorest families have not.

The Dow Jones Industrial Average struggled to hold above 30,000 points at the beginning of the year. Now 34,000 looks to be the floor and 36,000 has been achieved, with the index setting new all-time highs towards year end.

The more broad-based S&P 500 has also hit new highs around 4,700 points compared with 3,700 at the start of the year. It has doubled since the pandemic low of 2,300 in March 2020.

The bullish phase looks likely to last well into the new year despite some pre-Christmas wobbles.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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